What should we expect in 2018? This Atlas Market Report will provide some insight and bold predictions for you to digest and ponder. It is near impossible to not discuss some political impacts, but not be political. Avid readers of our newsletters know that we never take a side nor do we bang the drum on any major political issue. But whether we like it or not, it affects our lives and our investment portfolio’s.

Among many events throughout 2017, the most significant event that will affect your investment portfolio is the Tax Reform bill passed at the end of December 2017. We will address this later in the newsletter and we will build the evidence to our thesis of why we believe the market will be up 20% – 30% over the next 24-36 months.

S&P finished 2017 at 2,673 and we are expecting a top end move of 8% which is 2,886. We are looking for a modest rise in 2018 despite an aggressive 30% expectation over the next 36 months. The tax reform is now officially in place and corporations will be applying several aspects of it immediately. The anticipation of this will certainly push the market higher, but look for at least two or more 5% plus pullbacks in 2018. In prior newsletters we’ve presented our thoughts why 2017 didn’t have a significant pullback in the market and the main reason in our opinion was the “anticipation” of Tax Reform. During the early stages of the Tax Reform negotiation they were talking about making the policy retroactive to January 1st, 2017. Because it took too long to pass the Bill and negotiations broke down on that component, the market got propped up even more, let me explain. If someone came to you and said if you sell your profitable investments in 2017 you pay “x” in taxes on the profits or if you wait until 2018 to sell and lock in profits you will be 5%- 10%+ less (depending on your “new” tax bracket) would you wait to sell? Of course you would, as this is a simple economic premise to understand. This means we should expect a pullback sometime in January into February as Corporate Earnings for Q4’2017 are announced along with investors locking in profits. Many investors will apply such strategies such as Buying back those profitable positions to raise Cost Basis. It will take a good six months for several corporations to figure out and take advantage of the Tax Reform and will wait on the multi-national companies that will be deciding on how much money they will re-patriatate back to the United States. No one knows how much is truly overseas and no companies have made any commitments to how much they will bring back. The numbers range from $1 Trillion to over $2 Trillion as we expect at least half to come back to the United States to be taxed at a reduced rate. What will this money be used for in the next few years? The anti-tax reform politicians feel that the money will mainly be used for stock buybacks, dividends and executive compensation. It’s true, some money will be used for that, but we expect it to be used for M&A (Merger’s & Acquisition’s), R&D (Research & Development), hiring (more jobs) and business expansion. There is no way to measure what it will be used for or the impact to the business and economy. It can have nothing other than a positive impact in one form or another. Obviously many corporate stakeholders want to use it to build the business and ultimately create shareholder value. Look for a combination of everything, to be determined, but it will be a positive impact.

Tax Reform

Is this the perfect Tax Reform legislation, not by a long-shot, but there are many components to it that it will certainly have a positive affect on the US economy. We are not happy “Carried Interest” was NOT eliminated which is how Hedge Funds and their managers are able to make monopoly money compensation. Gary Cohn, the Trump Administration person that has been spearheading the Tax Reform effort was quoted as saying that the lobbyists were heavily involved with select congress people to keep Carried Interest intact no matter how many times it was taken out in several revisions. Citizens were hoping for fewer tax brackets and possibly more deductions, there was compromise on those items, but the major and most heated issue was SALT (State and Local Taxes) and the ability to deduct them. We won’t be having the debate in this newsletter, but depending on where you are located in the US, it will affect you. We suspect there may be an adjustment with this over the next few years, especially if the GOP loses one of the houses. It may be as minimal as a Cost of Living Adjustment(COLA) in the future.

The biggest issue and the core focus was the Corporate Tax Rate. The political left spin it’s a tax break for the wealthy and for corporations. The political right spin is the US can be competitive internationally as we had one of the highest corporate tax rates in the world, hence why many corporations have fled to other countries, outsourced much of its work and have so much cash outside the US that never paid taxes on those corporate profits. I (Ron Lang) agree with the latter and will give you the major reason why. In recent business history you should remember the term “Corporate Inversions”. This is when a US-based company purchased an international company and moved their headquarters abroad to take advantage of their tax rate, which was obviously less then the US. The Obama administration and eventual Treasury Secretary Jack Lew came out began shaming those organizations and the political left spin was those companies weren’t being patriotic. Actually, those companies were doing what was in the shareholders best interest as they are the stakeholders of the company and they need to look how to maximize profits and compete in the international landscape. Whether you think this was right or wrong, this has been going on for “decades”! It didn’t matter which Presidential Administration was in power. When Apple CEO, Tim Cook testified in Congress about their corporate tax structure and how they have hundreds of billions outside the US that has never been taxed, he said that corporate tax structure was setup in the early 1980’s. The infamous millennial quote, “Don’t hate the hater, hate the game”. Yes, the game was corporate tax structure and now that the Corporate Tax Rate is going from 35% to 21%, you should see significantly less Corporate Inversions and more investment in the US. For example, you should see more Mergers & Acquisitions by major corporations which will lift their entire business sectors value. Look for more Research & Development to improve productivity, speed and innovation. In order to accomplish this you will need people, higher skilled people that will get increased wages because of the talent wars. This is good for our economy because of the trickle effect on the business environment, surrounding communities and their businesses, along with a boost to taxable income. This is the missing component to the entire tax reform legislation and why you can’t believe any economists on either side because they all have different models and score the impact of the Tax Reform based upon their political views. But does it truly matter if you get deep in the weeds on this? It doesn’t. The CBO (Congressional Budget Office) scores economic models with “static” data, which has never held true to good projections, but is used for budget purposes. The political right wants to use “dynamic” scoring, but there is no standard to model it accurately. What’s the difference? If the tax reform put an additional $2,500 in your pocket annually, what would the average citizen do with it. Static models will suggest next to nothing other than its more money in your pocket and less taxes to the government. Dynamic scoring suggests that you may spend it, invest it, pay off debt, etc. There is no right combination other than it will be a mix of all that. If they are spending it, then it helps the economy. If they invest it, then it props up the Stock Market. If they pay off debt, then it puts more money in their monthly budgets since they aren’t paying debt and high interests rates. Obviously we are simplifying this and ultimately there are so many ways you can spin this to believe what you want to believe, personal and political, but it will have a boost to the US economy. Unfortunately (or fortunately, depending on your views), Americans are spenders, not savers because better than two-thirds of our economy is based upon consumers and consumption. This will prop up our economy and raise prices. This means possible inflation, which is our biggest worry in the next 2-4 years.

Give the new Tax Reform a chance. If you are business owner it will affect you positively the most. We look for greater investment into the economy, especially if there is an Infrastructure Legislation and eventually Healthcare Reform this year. We have heard stories of 30%-40% increases in ACA (Affordable Health Care Act – Obamacare) for 2018. These price increases are unsustainable without reform and more competition in each state.

Investment Sectors

We are looking at the follow sectors to be excellent investments in 2018:

Biotechs and Pharma – they have underperformed the last two years, we expect 2018 to be a nice catch-up year and a big beneficiary of the re-patriation legislation.

Financials and some Banks – we expect interest rates to rise this year which will help with Net Interest Margins (NIM) for the banks. But the financials will do better because of the stock market gains and greater investments from average citizens that will have more money in their paychecks.

Technology should still be strong. Look for the Cloud-oriented stocks and select Semi-Conductor companies to do very well in 2018. Technology has historically lead the way to a higher market in recent years, 2018 shouldn’t be any different as investors look for growth and shy away from higher dividend yielding stocks.

Asset Protection

This is not 1997, 1998 or 1999. It may have appeared that way in 2017 and you may have gotten your Gatsby on! But cooler heads prevail, at least the ones that have built wealth over time. Depending on your portfolio size and overall net worth, you need to protect a portion of your portfolio. One of the best ways to do this is with a low cost (fee), FIA (Fixed-Index Annuity). With 100% Asset Protection, it is important to keep an eye on how to both grow and protect your assets. You CAN’T have 100% downside protection and 100% of all the upside. If you find an asset like that, remember, “if its sounds too good to be true…..it probably is!”. Smart investments are the most diversified and smartly allocated. If you aren’t sure how this may benefit you and your family, reach out to a FIDUCIARY-level professional. A fiduciary is someone that is licensed to have your best interest in mind.

Life Insurance

Why do we discuss this in the newsletter? It’s a necessary evil and when you are in the business we are, Life Insurance is quite often overlooked with our clientele and prospective clientele. Again, 2017 saw many good people lost and in some circumstances, families were not protected and put in very difficult financial situations, especially if the bread winner is the one who passes. One of the biggest reasons why people have not purchased Life Insurance or reviewed it in years is some people I’ve spoken too feel subconsciously that if the purchase it, they will die the next day. Are you laughing? I bet some of you are blushing because you feel the same way. It’s the same reason why people don’t go to doctors, subconsciously they feel they will plow through their medical issues because the doctor will find something they don’t want to know about. Yes, you can laugh at that one as I heard that one, but not as often as the reason why people don’t buy life insurance.

In Summary

Life is good, go buy Grey Poupon mustard and start burning those hundred dollar bills while you are sipping Cristal Champagne. Good advice? Of course not and those of you that have been avid readers of our newsletter and know me, Ron Lang personally, knows that I’m an investment mother hen to my friends and clients. Yes, we are more optimistic now more than we have been in probably 10 years with the economy and over the next 2-3 years with the stock market, but don’t be a pig with your investment winners. Don’t be greedy with your investment thoughts. Be diversified and allocate properly. Everyone is different. If your neighbor, drinking buddy, Maj Jong group, golf comrades, faith-based community members or even your auto mechanic gives you investment advice, think twice. Someone may have a good investing idea, but it doesn’t mean it’s a good investment for you. This is where people make some of their greatest investing mistakes; investing in ideas where you know nothing about it or not seeking investment advice from a licensed professional with an excellent track record.

Of course investing can be fun and on occasion you may want to invest in something that interests you but have no real knowledge in that business sector. That’s fine, as long as it is a small part of your portfolio. Be smart and know your risk profile. We wish you best in 2018, a happy and especially a healthy new year.

Market Commentary by Allen B. Lang, Senior Portfolio Manager

Dear Clients and Friends,

I hope you all had a terrific holiday season and wishing you all a very Healthy, Happy and Prosperous New Year, I am writing this mid-December just after the Fed raised rates another one-quarter of a percent. I have been expecting this for three months, as the Fed indicated that it was a strong possibility.

I, wrongly so, stayed on the sidelines waiting for our income ETF’s and Preferred’s to dip in prices as they did in November and December of 2016, just after the election, when the Fed raised rates in December (2016). But it didn’t happen and, the raise by the Fed today was received with a “yawn” by Wall Street. As if to say, “So what?”

So now what is ahead? The Tax Reform Bill has hit snags on many smaller issues and eventually got signed off. Regardless, the foundation for the ‘basics’ of the Reform Bill have passed both houses.

I expect our major corporations will continue their policies of increasing dividends and buying back stock.

This offers investors a higher yield on their investment as well as improving earnings per share, given that the corporate earnings are the same or higher than previous quarters and years.

While we have put emphasis on conservative securities that pay good dividends and have moderate growth, we can now look toward more Value and Growth securities as possible investments as their dividends and yields increase.

Will we get a pullback in the market? Will prices of stocks fall? Will there be recovery? if so how much of a pullback will we see? The answer is, I DON’T KNOW! I can give you my opinions and observations, but they are mine and only based on what I have observed in previous markets, albeit this current market is like no other EVER seen.

Nothing ever goes straight up and never stops. Conversely, nothing ever goes straight down to zero. YES, we will see some dips in the markets, overall. Some will appear severe, 1000 Dow points (?), 2000 Dpwpoints(?) These dips, if they occur, represent 3.8% and 7.5% respectfully. HORRIBLE? EARTH SHATTERING? No, just an adjustment. But you must remember where the markets are today relative to years ago when the Dow Averages were 1000 points, or 5,000 points. Pullbacks then of 100 points were headlines in the papers, the same for a 100 Dow point rise.

Today, 100, 200 or even 350 Dow points doesn’t raise many eyebrows.

This does not mean that one should be complacent. You must (as we try to do at Atlas Wealth Management) keep your eye on the ball. When prices of securities exceed what would be considered reasonable to a company’s current earnings and future earnings, it may be time to take profits off the table.

I believe we will see more consolidations in a few industries. What I mean is that companies will merge, be bought out and hopefully strengthen.

I had a conversation the other day with some friends, not clients, who asked me about electric cars and Bitcoin. I will tell you what I told them. This IS what I truly believe.

I believe there are three (3) “Boondoggles” being perpetrated on the public.

Bottled water. Are you telling me tap water is poisonous?

Electric cars. Would you spend $80,000 or $100,000 for a vehicle that only goes 250 or 300 miles and then has to get recharged for a few hours. The cost of recharging could be the same as gasoline.

GRANTED, electric cars keep the air cleaner.

Bitcoin. What is it? Cyber money? Look it up on Google. You find you don’t know who started it, what it is based upon. There is literally no information on it. YES, I believe that sometime in the future we will have “cyber money”. We’ll still have Gold, Silver and Platinum, but who knows what their values will be. I never will buy something I don’t understand. REMEMBER THE “TULIP FRENZY” OF THE 1700’S!

Predictions? Did someone just ask me for predictions? OK, but I’m reluctant to do so because of so many outside Influences that can instantly change things. IF our economy continues to grow, even with adjustments as they may happen, I think the Dow averages have a chance to hit 26,500 to 28,000. NASDAQ, 8000 and the S&P 2800.

There you have my predictions! And, you better not hold me to them.

Market Commentary authored by

Allen B. Lang, Senior Portfolio Consultant

Atlas Wealth Management, LLC

*We cannot make specific Stock, ETF and Equity recommendations in this report. Call us to discuss what’s on our watch lis­t that may be a fit for your portfolio.”

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